Maybe, just maybe

Paying attention, really close attention, to the news about the Real Estate market could conceivably drive one insane. We hear about thousands of foreclosures and how bad that is; then we hear housing prices are more affordable now because of all the foreclosures. There are other contradictions too numerous to list, but the common perception is that things are very, very bad.

Maybe it’s time to examine something good. One such example is the $7,500 tax credit available to first time homebuyers. If you make less than $75,000 per year; or $150,000 for a couple filing jointly, you qualify for this tax credit. You can not own a house currently nor have owned one in the past three years and the property must be in the United Sates.

The credit works like so. If you purchase a home for $195,000 the tax credit is calculated as 10% of price of the home to a maximum of $7,500. In this case the buyer would get the full $7,500 because ten percent of $195,000 is $19,500. The credit does not occur at the closing but rather when you file your taxes. In this example the buyer would be able to reduce his or her tax liability by $7,500.

The program allows the credited portion to be refunded to you, not simply utilized to bring the tax you owe to zero. In other words if you made the transaction in the example above and ended up owing $5,000 in taxes before the applying the credit, you would be refunded $2,500; the difference between the $5,000 you owed and the $7,500 credit.

To call this a tax credit is a little misleading however. While you do get the credit in the tax year you make the transaction, it works more like an interest free loan. You actually have to pay the credited amount back to the Government over the next 15 years. There is no interest but you must pay back 1/15th (6.67%) of the amount each year on your taxes. If you sell the home within the 15 years you must repay the remaining balance in full.

This is a good deal. Right now, there are distressed properties being sold at reasonable prices, interest rates are still very low, and loans are actually available to those that qualify.

A couple of notes: Anyone utilizing a community second mortgage or state programs such as SHIP (State Housing Initiative Partnership) does not qualify for the tax credit. Furthermore, don’t let the income provision stop you. The credit is actually available to people making up to $95,000, or $170,000 jointly, but they are only eligible for a portion of the tax credit not the full amount. The eligible amount is phased out, ending at $0 at the $95,000 level. I could describe the formula but after writing it I would probably find the Holy Grail, Amelia Earhart, and DB Cooper.

During the boom years of crazy lending the definition of a primary, or principal residence was stretched to incredulity. The IRS definition of a principal residence applies for this program. You must spend more than half your time residing in the property.

Currently there is no mechanism to apply the tax credit directly to a purchase transaction, but anticipating the credit, one could certainly increase monthly cash flow by reducing the federal tax withheld from their paycheck. Self employed folks could adjust quarterly tax payments to achieve the same result.

The program started on April 9, 2008 and ends in July of this year. If you recently purchased a home make sure to check with your tax professional to see if you qualify. More importantly, if you’re considering buying your first home (or first one in three years) find out if your transaction will qualify. Between the price reductions, the increased inventory, and the tax credit it might just be the perfect time to pull the trigger.